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Heritage Financial Group, Inc. Reports Second Quarter Net Loss Of $481,000 Or $0.06 Per Diluted Share

Net interest income for the first quarter increased 37% to $6.4 million from $4.7 million in the year-earlier quarter, primarily reflecting an increase in interest-earning assets related to both acquisitions and organic growth. The Company's net interest margin for the second quarter of 2011 decreased six basis points to 3.36% on a linked-quarter basis from 3.42% in the first quarter of 2011, and declined 19 basis points from 3.55% in the year-earlier period, reflecting excess liquidity related to the Company's capital raise in the fourth quarter of 2010 and acquisition activity, as those funds are currently deployed in lower-yielding investments.

The Company's total risk-based capital ratio at June 30, 2011, was 23.4%, significantly exceeding the required minimum of 10% to be considered a well-capitalized institution. This reflected, in part, the Company's second-step conversion and offering that was completed in November 2010, raising net proceeds of $61.4 million. The ratio of tangible common equity to total tangible assets was 12.3% as of June 30, 2011.

In the second quarter of 2011, the Company continued to post loan and deposit growth, with both increasing on a linked-quarter basis and rising significantly compared with the year-earlier quarter in all of its markets except Ocala. Ocala has been disproportionately affected by the real estate downturn and higher unemployment. Still, bank acquisitions, including the Company's second whole-bank acquisition in February 2011, accounted for much of the growth in loans and deposits over the past 12 months. At June 30, 2011, the Company's loan portfolio totaled $500.7 million, including loans acquired through FDIC-assisted acquisitions, up 1% from $496.1 million at March 31, 2011, including loans acquired through FDIC-assisted acquisitions. Total deposits stood at $763.7 million at the end of the second quarter of 2011, up 4% from $731.1 million at March 31, 2011.

Accounting for FDIC-Assisted Loans

The Company performs ongoing assessments of the estimated cash flows of its acquired FDIC-assisted loan portfolios. The FDIC-assisted loan portfolios consist of $60.4 million in covered and $24.2 million in non-covered loans as of June 30, 2011. The details of the accounting for the FDIC-assisted loan portfolios for the second quarter of 2011 are as follows:
  • Covered loans acquired in FDIC-assisted acquisitions decreased $1.9 million from the first quarter of 2011;
  • Non-covered loans acquired in FDIC-assisted acquisitions declined $4.0 million during the quarter;
  • The FDIC indemnification asset associated with covered loans acquired in FDIC-assisted acquisitions remained unchanged at $58.2 million;
  • The non-accretable discount decreased $3.7 million to $67.3 million; and
  • The accretable discount increased $1.4 million to $4.1 million, and $224,000 was transferred to income.

At June 30, 2011, covered and non-covered loans acquired in FDIC-assisted acquisitions decreased to $60.4 million and $24.2 million, respectively, on a linked-quarter basis from $62.3 million and $28.3 million, respectively, driven by a combination of net charge-offs, principal reductions, and balance transfers from non-covered to covered. The net charge-offs for both the covered and non-covered loans were fully provided for by the associated loan discounts and expected reimbursement from the FDIC and did not affect the Company's loan loss reserve. Although the FDIC indemnification asset associated with covered FDIC-assisted loans remained unchanged at $58.2 million, $1.5 million of net charge-offs and another $158,000 in expenses associated with covered FDIC-assisted loans were set aside for FDIC reimbursement as of June 30, 2011.

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